We’re now less than two months away from the annual Stocks and Shares ISA deadline. In April, the allowance resets, meaning that I then have the next year to invest up to £20k in the ISA. This is sheltered from capital gains tax and dividend tax. If I break this down to a monthly target, I want to try and reach a stage where I can invest £1,666 each month to maximise my potential. Here’s how I’m trying to do just that!
Managing my finances
To begin with, I have to admit that I won’t be anywhere close to maximising my £20k allowance for this current year. Even for the 2023/24 ISA year, I’ll struggle. Yet the whole point is to try and build up to a level whereby I can hit this amount at some point during the future.
The first way I can increase my investment amount has nothing to do with what I invest in. It revolves around my income and expenses. In a similar way to a business, my income minus expenses each month leaves me with either retained earnings or a deficit. So if I can reduce my costs or am fortunate enough to increase my pay, I’ll benefit from having more money left over at the end of the month.
The dividend plan
Granted, that may seem like an oversimplification! If I can’t do the above, I can make the most of my current contributions. One of the benefits of my ISA is that I don’t pay dividend tax. So if I put my fresh cash into income stocks, I’ll receive the gross payment amount. I can then take this money and use it towards my goal of investing £20k.
Let’s say I invest £500 a month at the moment. If I divert all of this to income stocks with an average yield of 7%, I’ll make around £420 a year. This naturally increases year-by-year as I invest more. In years to come, I could reach the stage whereby I only invest £500 of my own fresh money, but receive £1,100 of dividend income from my long-term portfolio. I then take this £1,100, club it together with my new money and invest £1,600 for the month.
As a side note, dividend income received within the ISA doesn’t count towards my £20k allowance. Yet this is a good thing, as it means my ISA allowance can be larger.
Forecasting the future dividend payments is very difficult. There’s a lot that can change further down the line that can mean my income isn’t as much as I’d expect it to be. This can slow my progress towards my goal.
An eye on the long term
The bottom line for me is to focus on growing my investment amount each month. I’m going to try and do this via reducing my expenses, as well as putting more money in dividend stocks. Even though I won’t be able to hit the magic number of £1,666 in the immediate future, it’s definitely a realistic goal I can work towards.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
